Protecting Retirement Accounts for Spouses Who Need Long Term Care

Protecting Retirement Accounts for Spouses Who Need Long Term Care

Given the rapidly increasing cost of long-term care in a nursing home or assisted living facility, many couples inquire about how to protect their assets from being consumed by such costs, particularly their retirement accounts which often account for the majority of their wealth. While the Medicaid program is designed to provide payment for long term care costs for those who cannot afford the monthly cost, it is only available to those who qualify financially. A major determining factor for Medicaid eligibility is the amount of resources (assets) that are available to pay for care. An applicant for Medicaid cannot qualify for assistance if they possess excess assets, including the value of their retirement accounts. The Medicaid program also looks at the assets of the spouse in determining whether the applicant qualifies for assistance.

For married couples, the spouse who needs long term care (the “institutionalized spouse”) can only have $2,000. The spouse who does not need long-term care (the “community spouse”) can have the residence, vehicle, personal property and their own retirement accounts. They can also have a community spouse resource allowance that is based on the total countable assets that the couple has at the time of applying for Medicaid (between a minimum of $50,000 and a maximum of $130,380). Although the community spouse’s retirement accounts are not counted, all retirement accounts of the institutionalized spouse are counted in determining the asset limit. This can be very problematic when the institutionalized spouse has larger retirement accounts than the community spouse. Normally, the institutionalized spouse cannot just transfer their retirement accounts to their spouse without triggering income tax on the entire amount transferred.

The exception is a transfer of a “qualified” retirement asset that is divided by a Qualified Domestic Relations Order (QDRO). Qualified plans include: 401(k) plans, profit sharing plans, pensions, 403(B) plans and some forms of Simplified Employee Pension (SEP) IRAs. QDRO’s are typically thought of as a mechanism to divide assets when a couple divorces; however, if the retirement account is held in a “qualified plan” it can be divided by a QDRO without having to go through a divorce. Although a court order is required, it can be obtained in an action in family court for property division of a married couple, or through a guardianship action for transfer of the ward’s assets to a spouse, and no divorce action is required. Whether to bring the action in family action or a guardianship action will vary depending upon the circumstances, but either will accomplish obtaining the necessary court order.  Importantly, if the retirement account is an IRA, then a legal separation action must be filed in family court. Federal law provides that non-qualified retirement assets that are transferred from one spouse to another are not taxed if “transferred under a divorce or legal separation instrument.”

The benefits of the transfer of retirement accounts are numerous. Once a retirement account is transferred, the community spouse will become the owner of the qualified plan, without triggering any tax. The account will be considered an exempt retirement asset of the community spouse and will not interfere with the institutionalized spouse’s eligibility for Medicaid. Furthermore, any income received from the retirement account will not be considered available to pay the institutionalized spouse’s care costs and will not be available for estate recovery.

Although the transfer of a retirement account can be accomplished at the time one spouse needs care, it is important to think about advanced planning so that if retirement accounts need to be transferred pursuant to legal action, you have given each other the authority to do so under your durable general powers of attorney or other documents in case the institutionalized spouse is unable to sign the documents necessary to participate in the planning. Consult with a qualified elder law attorney who can be sure that you have the necessary documents in place for this important advanced planning.

 

Post Pandemic Public Benefits, Who Will Lose Eligibility?

Post Pandemic Public Benefits, Who Will Lose Eligibility?

During the Public Health Emergency (PHE), the State of Wisconsin was required to keep people enrolled in Medicaid as a condition of receiving a temporary increase in the federal share of Medicaid costs.  When the PHE ends (recently extended to January of 2022) so will the increased funding, and the state will need to look at whether currently eligible individuals will be renewed for benefits. 

Those individuals who could keep benefits during the PHE were:

  • Individuals who did not pay their patient liability or monthly cost share;
  • Individuals who did not report changes in assets, income, work status or household composition;
  • Individuals who received maximum FoodShare benefits during the pandemic regardless of qualification; and
  • Individuals over age 65 who received prescription drug benefits but did not do their annual renewals or pay the annual fee.

When the enhanced federal funding ends, states will need to resume processing renewals for eligibility, many of which have been pending for almost 18 months.  Current federal guidance provides that states will have up to 12 months to discontinue benefits that were extended under the PHE.  Further, an individual must be provided with at least 60 days advanced notice before losing benefits.

For individuals who properly reported the receipt of excess assets and income during the PHE and continued to receive benefits, an overpayment occurred that has not yet impacted benefits.  For those who did not properly report changes in resources, a discontinuance of benefits may be looming.  The fate of those who properly reported changes remains to be seen in terms of how the penalty for overpayment will be treated.  Generally, only those overpayments that are due to a consumer’s failure to report or provide updated information are recoverable.  Consult with your attorney to ensure that you are provided with the requisite time frame to provide necessary eligibility verification and proper notice of any adverse action regarding benefits.

 

#FreeBritney. How is Conservatorship Supposed to Work?

#FreeBritney. How is Conservatorship Supposed to Work?

The recent media attention to pop star, Britney Spears’ conservatorship has painted a dismal picture of arrangements whereby a court-appointed individual has authority to control various aspects of another individual’s finances and personal decisions. Public opinion has been harshly critical of the long-running conservatorship, fueled by Spears’ claims that her conservators are not just overstepping their authority, but that they are abusive and exploitive.

Spears’ pleas to end her conservatorship have caught the attention of not only her fans and the Hollywood elite, but of legal and mental health professionals who are interested in legislative reform to conservatorship arrangements. Conservatorships (called “guardianships” in Wisconsin) are meant to protect vulnerable individuals by placing their decision-making rights in someone else’s hands. If the decision-making authority is in the hands of someone who is abusive or exploitive, an individual under conservatorship is particularly unable to defend themselves given their incapacities. This is where court oversight becomes a necessity.

Importantly, as with most areas of the law, the legal rules differ from state to state. In Wisconsin, there are two arrangements whereby a court-appointed individual controls another person’s finances or their personal/health care. The first arrangement is called “guardianship,” which is an involuntary appointment of a responsible person (called the guardian) for someone who the court has determined cannot care for himself or herself, or who cannot manage his or her own finances (called the ward). The court can appoint a guardian of estate (finances) or a guardian of person, or both. The second arrangement, called “conservatorship” is a voluntary arrangement whereby an individual (called the conservatee) asks the court to appoint a conservator to handle their finances. The voluntary conservatorship can be terminated by the conservatee at any time upon request. In many states, including California where the Spears case is being addressed, a conservatorship is an involuntary procedure.

Guardianship and conservatorships are often used for people who have severe cognitive impairment that renders them substantially incapable of receiving and evaluating information necessary to make appropriate financial, personal and health care decisions. The impairment may be the result of conditions such as dementia, developmental disabilities, mental illness or brain injuries, for instance.

In Wisconsin, guardianship is considered an extreme step used as a last resort and when there are no other less restrictive options. A ward has the right to their own attorney, the right to present medical evidence that their incapacities are not sufficient to require guardianship, and a say in who becomes their guardian. In addition, the court is required to appoint an independent attorney, called a Guardian ad Litem, whose role is to evaluate whether guardianship is in the proposed ward’s best interests.

Wisconsin’s guardianship laws have already been reformed to provide that a ward’s rights are only removed if absolutely necessary. A ward should retain the right to make all decisions he or she is capable of making with appropriate supports in place. The authority of a guardian in Wisconsin only extends to those areas of functioning that a person cannot manage on their own (or on their own with support). It is not intended to be used to protect someone from making “bad” decisions. The court is required to evaluate whether a ward should lose their right to take part in all areas of decision making, or whether the ward should retain rights in certain areas.

Ending a guardianship can be difficult if the ward cannot demonstrate by medical or other evidence that the condition resulting in their incapacity has improved, or that other supports have allowed appropriate functioning to resume, but the law is clear that a ward may request (petition) to end their guardianship. Further, if the law is intended to be less restrictive to the individual, it stands to reason that the conservatorship should be terminated if the individual no longer meets the standards.

In Spears’ case, it is impossible to speculate whether the conservatorship should be terminated without knowing all the facts. Persons under guardianships and conservatorships often have improved functioning in many personal and financial aspects of their lives simply because they are benefiting from assisted decision making, medication management and are free from outside exploitation. Under appropriate review and oversight, the conservatorship or guardianship should nonetheless be terminated if the standard for incapacity is no longer met. This can be a hard pill to swallow for concerned family members who believe – often correctly – that once assisted decision making is over, the dysfunctional behavior will resume.

Either way, it is important to remember that although the case of a famous pop star might bring about legislative reform, when handled properly, conservatorships and guardianships play an important role in protecting elderly, disabled and mentally ill adults from abuse, exploitation and the harm that could result from the inability to make effective decisions. If you are concerned about a loved one with impaired decision making, it is important to talk to an attorney who specializes in guardianship and conservator arrangements regarding appropriate options.

 

The Purpose of a Tax ID Number for an Estate

The Purpose of a Tax ID Number for an Estate

For those who are unfamiliar with estate and probate administration, the need for a separate tax identification number can be confusing. Most people are familiar with the idea that when you file your individual tax returns each year, you need to include your social security number (SSN). Your SSN functions as your “Tax Identification Number” for the Internal Revenue Service (IRS). When an individual passes away however, their SSN can no longer be used to report income earned after their date of death.  Therefore, one of the first tasks of a Personal Representative (or Executor) should be obtaining the federal tax identification number for the estate.

There are many scenarios where the estate continues to earn income after the decedent’s death. It often takes many months to complete the administration of the estate. During that time, the Personal Representative will need to open a bank account to collect the estate’s assets and pay ongoing administration expenses. The Personal Representative will need the tax identification number for the estate in order to open the bank account. The Personal Representative will also need to request that any investment accounts registered under the decedent’s social security number be re-registered in the name of the estate and the estate’s tax identification number. The estate will be earning income, such as interest accruing on the estate’s bank accounts, dividends paid on stocks or other investments, or rental income from tenants, until the assets are fully liquidated or transferred to the beneficiaries.

Under current federal law, if an estate generates more than $600.00 in income, the Personal Representative must file a separate tax return known as a Form 1041. This is a separate return from the decedent’s final individual tax returns, which also must be filed (under the decedent’s individual SSN) to report the income earned in the calendar year prior to the decedent’s date of death. The estate’s income tax return will report only the income earned after date of death.

Applying for a federal tax identification number, also known as an Employer Identification Number (EIN), is a free service offered by the IRS. If you are working with an attorney to settle the estate, you can provide the attorney with an authorization to obtain the number on your behalf. If you obtain the number without the assistance of an attorney, beware of websites on the Internet that charge for this free service. If you are uncertain about obtaining the tax identification number, use caution and seek the advice of a probate attorney.

 

Estate Planning for Second Marriages

Estate Planning for Second Marriages

Although second marriages are more common than ever, developing an estate plan for couples in second marriages can be complicated and challenging, especially when one or both spouses have children from prior relationships as well as an accumulation of wealth and assets that each spouse has brought to the marriage.  As an attorney who settles estates, I often find that spouses in second marriages have not done any planning to address how their assets should be allocated between their surviving spouse and their respective children.  This can lead to disagreement and litigation as the surviving spouse and children of the deceased each attempt to determine the deceased spouse’s intentions.

While there are a variety of reasons individuals and couples procrastinate in completing an estate plan, I have found that many times spouses in second marriages have simply made the incorrect assumption that if they keep the assets that they have each accumulated prior to the marriage in their separate names that they can easily and seamlessly leave assets to their respective children without involving their spouse. Unfortunately, this does not work under Wisconsin’s marital property laws.

Why does planning matter?

Under Wisconsin law, all property of spouses is presumed to be marital, regardless of whether spouses hold assets in their own names or keep their assets physically separate.  This means that spouses are only free to leave half of all marital property to their children, since their spouse is presumed to already own the other half.  This can have disastrous consequences to an intended distribution upon death, particularly when naming the spouse or children on a life insurance policy, retirement account, or other financial account as a direct beneficiary.  These designations do not take into account that both the children and the spouse are each entitled by law to a portion of the assets, regardless of the beneficiary designation.

Fortunately, spouses are free to opt out of marital property law by executing a marital property agreement.  While we often think of marital property agreements as a contract spouses enter into in case they divorce (also called prenuptial agreements), marital property agreements are widely used in estate planning to create a clear plan and obligations about the distribution of property upon death. A marital property agreement coupled with a Will or Trust that spells out the decedent’s intentions is important to make sure that both the surviving spouse and the children of the prior relationship receive those portions of the estate as intended by the decedent.

What if you are in a second marriage but do not have a marital property agreement?

If there is no marital property agreement and a spouse dies without a Will (called dying “intestate”), the assets automatically go to the living spouse. However, in second marriages where there are children from a prior relationship, the children from the prior relationship are entitled to one-half of the deceased spouse’s individual property and all of the deceased spouse’s interest in marital property.  Surviving spouses are often surprised to find that one-half of the property that they brought to the marriage is also a part of the deceased spouse’s estate, and that the children from the prior relationship may be entitled to half of the value.

This is where things can get complicated and why estate planning documents (like marital property agreements, wills and trusts) are so important in second marriages.  After death, disputes commonly arise about property division. This can lead to a lack of trust and damaged relationships among the survivors.  Furthermore, either the spouse or the children may be the only ones to have access to relevant financial information while others don’t. It is important to make sure you have Powers of Attorney for healthcare and finances in place so spouses can name who may make decisions on their behalf in order to avoid spouses and children battling for control through the courts.

While estate planning for couples in second marriages can be more complicated than for first marriages, advanced planning to make sure that your intentions are clear goes a long way to avoid litigation, financial and emotional fallout for all parties involved.

 

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